NATCO Pharma Ltd

About the Company

Natco Pharma Limited was incorporated in Hyderabad in the year 1981 with an initial investment of only INR 33 Lacs. With a modest beginning of operations as a single unit with 20 employees, Natco today has seven manufacturing facilities spread across India with dedicated modern research laboratories, capabilities in New Drug Development, etc. Natco family currently consists of around 5000 employees, they are consistently ranked among the fastest growing pharmaceutical companies in India. Natco is well recognized for its innovation in Pharmaceutical R&D.

Notes on Annual Report (FY18-19)

Business Divisions

Natco Pharma Limited is a vertically integrated and R&D focused pharmaceutical company engaged in developing, manufacturing and marketing of finished dosage formulations (“FDF”) and active pharmaceutical ingredients (“APIs”). Their focus is primarily on niche therapeutic areas and complex products. They market and distribute their products in over 40 countries. They sell their FDF products in the United States, India, Europe and the rest of the world (“RoW”).

Over the years, meticulously built businesses across different molecules, multiple therapy segments and global markets, through strategic alliances and manufacturing capabilities.

Steadily increased its presence from an oncology-focused product portfolio to multiple therapy segments.

After the initial high-impact foray into oncology in 2003, through Imatinib, they have made their mark in the gastro hepatology segment through the launch of Hep C. They have further capitalized through well-recognized product launches of Glatiramer Acetate, Liposomal Doxorubicin and Oseltamivir in the US.

A few years ago, they made a conscious decision to diversify their exposure into other non-US markets to minimize the impact from economic and geographic risks.

Taken a unique global portfolio approach towards their products by filing for approvals across different markets.

Selective investments in crop health sciences, by building on their existing resources and skill sets in both chemistry and manufacturing.

Filings and Patents Detail

Snapshot of Business Performance

Macro Trends in Pharma

In USA, generic face pricing pressure, specialty drugs command higher value. The interesting opportunities in the US market will be restricted to niche products and complex generics.

With an estimated spending of $31.8 billon, the Brazilian healthcare market is the world’s seventh largest. The Brazilian government’s largest spending is on healthcare and 80% of the pharmaceutical market is being driven by federal and local tenders. To contain its healthcare costs, the Brazilian government is moving towards generics.

The Government of India with its grand scheme of Ayushman Bharat-Pradhan Mantri Jan Aarogya Yojana (AB-PMJAY) targets over 50 crore beneficiaries. This is seen as the ‘world’s largest healthcare programme’.

Pharmaceutical spending in China reached $137 billion in 2018, making it the world’s second largest pharma market. China could be a significant opportunity for Indian players.

Message from the Management

NATCO’s investments in emerging markets are bearing fruit and they are growing their footprints in Canada, Brazil and South East Asia.

In FY19, the market dynamics in the US and India were largely unfavorable, and there were several macro pressures on the business.

Some of their key products in the US have seen strong competitive pressures while in India, they have seen market size reduction in the Hepatitis C portfolio.

A few years ago, they perceived risks surrounding their business, especially the onset of strong headwinds in the US market and had taken firm steps to increase their pace of development in the emerging markets, especially India, Brazil and Canada.

The result of the geographical diversification is that the non-US market’s revenue stood at INR 1173 Cr for FY 2018-19.

NATCO is focusing on filing of oncology products for markets in China and has begun exploratory work for expansion into Africa.

For the year, the R&D spend stood at INR 198 Cr or 9% of the total revenue.

INR 443 Cr was spent on creating new capacities.

Company is also investing to further establish its presence in Australia, Singapore, China and South East Asian countries. Businesses in these market will propel growth in the future for them.

To leverage their skills in organic chemistry they have forayed into the crop health sciences space as well. They are looking to address the unmet needs in Integrated Pest Management (IPM).

During FY19, the company announced a buyback and purchased about 30 lakh shares worth INR 186 Cr. The market value of the company was under sharp discount (of more than 30 %) from their All Time High price. The buyback reflects promoters’ faith in NATCO’s long-term prospects, and a move to improve the return on equity for shareholders.

In FY19, three interim dividends announced amounting to INR 138 Cr including dividend distribution tax of INR 24 Cr and it results in a pay-out of 20.72% of standalone profit after tax.

Business updates by Geography

Points from Management Discussions Analysis

The global spending on medicines reached $1.2 trillion in 2018 and is expected to exceed $1.5 trillion by 2023; growing at a compounded annual growth rate (CAGR) of 3–6% over the next five years (Source: IQVIA: The Global Use of Medicine in 2019 and Outlook to 2023).

The US pharma spending registered $484.9 billion in 2018 on the back of new product updates and brand pricing. Most drug makers limited their annual price hike to 6% for branded products due to criticism of price hikes by manufacturers on established products.

Spending on medication in pharmerging markets recorded a robust 9.3% CAGR in 2014-18 to register $285.9 billion. Factors such as governments’ efforts to make healthcare products accessible to multiple geographies and consumers’ ability to afford better healthcare products on the back of higher disposable income bolstered overall spending. Pharmerging markets are expected to grow at CAGR 5–8% over the next five years.

Within the pharmerging markets, China, Brazil and India have the greatest medicine spending.

Pharma spending in India stood at $20.4 billion for 2018 and is expected to grow at a CAGR 8-11% in the next five years to touch $28-32 billion, making India one of the top 10 pharma markets by 2020.

In FY 2017-18, India exported pharma products worth $17.27 billion and by 2020, the industry estimates the exports to grow by 30% to reach $20 billion.

In FY 2018-19, NATCO’s revenue from operations on a consolidated basis amounted to INR 2224.7 Cr, recording a 26.9% CAGR over the last 3 years. Profit after tax stood at INR 644.4 Cr, representing a CAGR of 60.1% over the last 3 years.

The EBITDA for the year was INR925 Cr, representing an EBITDA margin of 41.6%.

The Company declared three interim dividends for the FY 2018-19. Collectively, all the three dividends stand to 17.18% of standalone profit (excluding divided distribution tax).

During the year ended 31st March 2019, the Company bought back 2015656 equity shares with Face Value of INR 2 each for an aggregate purchase value of INR 132.9 Cr, excluding transaction costs. This means the effective rate at which the company bought back its stock was around 660.

Exhibits

Analyst’s View

NATCO Pharma is one of the long standing pharma companies in India with a good track record over the years. It has been a long term wealth creator for its shareholders. Unlike most pharma companies which are dependent mainly on US market, NATCO has diversified into other geographies like Canada, Brazil, China and many other to de-risk their dependency on the US markets. Robust pipeline of products, strong research capability, high free cash flows and reasonable valuations make this large pharma company worth looking as an investment option.